The news broke shortly before Christmas last year: Executives from Codelco, Chile's state-owned copper mining company and the world's largest copper producer, had summoned representatives from the winning bidder to build a massive desalination plant in northern Chile and informed them that their concession award was canceled. The decision took the market by surprise. The project had been touted as a critical infrastructure Project for Codelco, both as a matter of environmental policy — industrial dependence upon freshwater in the driest region on earth would drop — and economics — hefty freshwater supply costs at Codelco's mining operations were projected to fall by 35%. And the competitive three-year tender process through which Codelco had selected MTT (comprising Marubeni Corporation, Transelec and Techint Chile) had just concluded on November 4, 2019.
Codelco's executives informed MTT that they were opting to cancel the concession award (the concession agreement itself was not yet signed) in light of a decision to revise the project structure. Codelco would then re-bid the project, and the completion timetable would be delayed by at least two years. Most of the press latched on to the renewed market opportunity and moved on — a new competitive tender for the desalination project with more than double the capacity of the original is expected in March 2020. But Codelco publicly alluded to a second motivation: It had decided to restart the tender to ensure that the process complied with new "probity and transparency" requirements at the mining company.
Why the new focus on "probity and transparency"? First, Codelco was under official scrutiny relating to a tender process on an unrelated concession (Trepsa-Cerro Alto S.A.). On November 6, a public auditor disclosed information suggesting that certain cost figures in the tender for the now over-budget project had been manipulated at the bidding stage. Second, a recent criminal complaint in a Chilean court alleged a violation of anti-corruption laws in connection with an upstream oil and gas project that involved that Techincht, an affiliate of Techincht Chile (20% owner in MTT). Although we have not found a public explanation for a shift in focus to "probity and transparency" at Codelco — and political backlash against the scandals was also likely a factor — there is a realpolitik explanation for why the concession was likely pulled: The allegations raised an objective concern over the ability to raise the more than $1 billion in financing that the project would require if it were to have proceeded.
Why Anti-Corruption Concerns Matter to Banks
Global financial institutions are subject to anti-corruption and sanctions laws in many jurisdictions, regardless of where their borrowers or financial counterparties are located. In the U.S., the Foreign Corrupt Practices Act ("FCPA") prohibits offering or giving anything of value to a foreign government official, regardless of where the conduct occurs in the world. The FCPA applies to (a) issuers of securities on U.S. exchanges; (b) "domestic concerns" (defined as U.S.-incorporated entities and their employees, as well as U.S. citizens, residents and nationals); and (c) persons located in the U.S. Further, the U.S. Department of Justice and the Securities and Exchange Commission have taken very broad views of the FCPA's jurisdictional reach, finding jurisdiction where, e.g., conduct occurs in U.S. dollars or involves a single U.S. citizen or domiciled entity.
FCPA violations present a number of risks for financial institutions. First, financial institutions can face securities law liability to the extent they have a role in the filing of a prospectus that fails to disclose an FCPA violation on the part of the issuer. Second, financial institutions can suffer reputational damage to the extent a customer is involved in bribery. For these reasons, underwriting agreements, loan agreements and other instruments often include representations that the issuer/borrower has not committed FCPA violations, and covenants that that party will not use the proceeds of the offering/loan to commit FCPA violations or repay its obligations using funds derived from unlawful activities.
Sensitivity of long-term project finance lenders to anti-corruption concerns involving affiliates of a borrower can be especially acute. Typical know-your-customer ("KYC") requirements associated with a limited recourse borrower could have prevented lenders from lending to a Techint affiliate under the circumstances. In this case, where Techint was likely to perform the EPC works on behalf of the borrower, lender scrutiny would likely increase in light of the Chilean criminal complaint, as legal, financial and reputational risk would be greater. In credit documentation, a common condition precedent to closing or funding is the absence of any litigation that could materially impair sponsors or guarantors to projects, or that could reasonably be expected to have a material adverse effect (typically defined in the agreement). It is reasonable to assume that criminal fraud claims against a borrower's or sponsor's affiliates could materially adversely affect an obligor. The experience of the many projects touching Odebrecht several years ago are a case in point.
Codelco's move may have been prudent; in the weeks after it cancelled the concession, Techint has faced additional inquiries in Argentina and Italy relating to allegations of corrupt practices. Still, while the suspension of the Codelco desalination concession award may have avoided far greater financial losses than would have occurred if the project had proceeded to financial close, Codelco's infrastructure plans are delayed and both Codelco and other consortium members have sunk development costs that will be difficult to recover.
Investors in infrastructure and energy projects, particularly in jurisdictions with higher risk of corruption, including Latin America, Africa and Asia, should consult anti-corruption specialists at an early stage of project development. It is critically important to (1) conduct appropriate due diligence on all project partners, particularly those who might have direct interactions with government agencies; and (2) ensure that development and joint venture agreements include appropriate representations and warranties, covenants and indemnitees.
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